On the Margin

Chipotle is in uncharted territory


This post is part of the On the Margin blog.

Chipotle Mexican Grill’s same-store sales fell 14.6 percent in the fourth quarter of last year. They will likely fall in the 25 percent to 30 percent range in the current quarter, following the chain’s recent update of its financials.

Those are not good numbers. Its sales decline has been worse, and its recovery slower, than any other major restaurant chain connected with similar outbreaks in at least the past 25 years.

As we said previously, Chipotle’s same-store sales will likely stay negative for a year before they turn positive, and based on historic precedent it will take some time to get back to the Chipotle of old. But the severity of the decline makes that difficult to predict.

In other words: Chipotle is in uncharted territory.

In 1993, hundreds of people, mostly kids, were sickened eating at Jack in the Box in what remains the most severe outbreak in modern industry history. Same-store sales fell 22.2 percent the subsequent quarter before recovering to a single-digit decline the rest of that fiscal year.

A more recent example is Yum! Brands in China. In July of 2014, Yum’s KFC brand had just been recovering from a food safety scare two years earlier when another one hit western brands in that country. Same-store sales for Yum China fell 14 percent the subsequent quarter and fell for the next three quarters before turning positive a year later.

Chipotle has had a number of outbreaks in an era of 24-hour news, the Internet and a social media environment that spreads local news rapidly. It was a remarkably popular chain for years, a darling of both Wall Street and Main Street and the gold standard for modern restaurant entrepreneurs. So it is under a giant-sized microscope — and had more to lose before the issue started.

That microscope was in full effect this month. In the first week of March, same-store sales fell 21.5 percent, an improvement from the 26.1 percent decline in February. Then Chipotle closed a location in Massachusetts after workers there turned up ill.

Chipotle closed the store for a couple of days out of caution and reopened the location after receiving a clean bill of health from inspectors. And still news spread and its same-store sales fell again, down by 27.3 percent in the second week of the month. Also, keep in mind that it’s nearly five months after restaurant closures in Washington and Oregon brought the matter to the public consciousness.

“This could take a while,” Jefferies Analyst Andy Barish wrote in a note yesterday. He downgraded Chipotle’s stock, and gave it a $350 price target. The company currently trades at around $500 — and company executives have bonuses tied to a recovery in the stock price that brings it to at least $700 a share.

Maxim Analyst Stephen Anderson also downgraded the stock yesterday with the same price target. Chipotle “faces an extended recovery in which positive [same-store sales] are unlikely until 2017."

All that said, several analysts have Buy recommendations on the stock and believe the company, and the stock price that has fallen by 36 percent since August, can recover. “We believe the company will be able to deliver a relatively steady improvement in same-store sales trends over the course of the year,” wrote Piper Jaffray Analyst Nicole Miller Regan, who has an “Overweight” rating on the stock.

And there’s no question that Chipotle’s sales can come back. It is a good restaurant chain with fast service and a flexible menu of items people historically love to eat. And in almost every case, consumers have ultimately returned to restaurant chains hit by high profile foodborne illness outbreaks.

But its current sales problem is nearly unprecedented. And that makes its recovery difficult to predict.

Contact Jonathan Maze at jonathan.maze@penton.com
Follow him on Twitter at @jonathanmaze

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What's On the Margin?

Jonathan Maze follows the money


Jonathan Maze

Jonathan Maze covers finance for Nations Restaurant News, as well as restaurant chains based in the Midwest. Jonathan came to NRN in 2014 after seven years covering restaurants for Franchise Times...
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